Is This Not News?

We know there is a lot going on in the world, but the announcement by the Postal Service that they would not be raising postage rates in January is news that has not been picked up by the media. Everybody knows the Postal Service is broke. Or is it, really? What is going on?

It’s the Economy

Good economic news no longer grabs headlines. The popular story line is that economic growth is just not good enough. That may be true for electoral politics, but it certainly is not true for businesses and consumers. Despite recent stock market gyrations, the leading economic indicators continue to show gains. More credit is available to households, households are spending more (although carefully), and more households are being formed. Total mail volume so far in 2014 (Q3) is about the same as it was for the same period last year (instead of declining).

It’s the Last Rate Increase

Few really liked it (nobody wants to pay more), but it seems to have worked. Operating revenue increased by $327 million for the quarter, up 2.0 percent from last year. Although the volume of First-Class Mail declined 1.4 percent, revenue was up 3.2 percent due to the impact of the exigent rate increase. There are some indications that the rate of conversion to online banking is slowing, at least for a while.

It’s Packages

Package revenue was up 6.6 percent, as volume grew 7.7 percent. The Postal Service continues to experiment with new price discounts (while other carriers are raising rates) and services such as Sunday delivery, Same Day Delivery and even grocery delivery. While these new services are not yet a significant revenue factor, they represent a new willingness to grow the business. The Postal Service has unveiled a well-thought out comprehensive plan to further improve its package delivery services. The Postal Service is well-positioned to take advantage of every earlier demand for e-Commerce holiday shipping volumes.

It’s Direct Mail

Direct Mail volume increased almost one percent, and revenue increased a bit more than five percent. This was due, again, to the earlier rate increase. Hard fought mid-term elections are likely to drive local mail volumes, and the prospects for increased direct mail volumes are likely. Several studies indicate that local direct mail is still an effective tool for smaller businesses.

It’s Productivity

The core operating costs, focusing on labor, barely increased compared to last year. The Postal Service is keeping its operating costs down, even though they have faced opposition to many of their cost reduction initiatives. They simply have continued to manage their operations effectively – despite occasional local glitches.

It’s Effective Management

The Postal Service has done a very credible job of managing its cash flow, liquidity and other financial issues under extremely difficult conditions. Service performance and customer satisfaction remain reasonably high. The conversations coming from the Postal Service have shifted a bit, as they now talk about the need for significant investments necessary to grow the business, especially in the package market.

It’s Employee and Labor Relations

The unions have contributed to the success of the Postal Service through several agreements in the last round of labor negotiations. While postal labor relations are often complex and sometimes contentious, the Postal Service now has a bit more flexibility and a slightly lower average wage rate. Health care contributions from postal employees will be increasing in the coming season at a higher rate than the postal contribution.

Why is this not News?

The usual story line is that the Postal Service is failing. It is not, and the commonly accepted wisdom is wrong. Good news doesn’t grab the headlines, and it’s hard for many people to grasp after literally years of bad news. Nothing else seems to work right these days, but the Postal Service does.

This does not mean that the Postal Service is out of the woods yet. First-Class Mail is still on a downward trend. The USPS still needs Congressional action to remove the artificial financial burden they placed on the organization in 2007. It needs increased market and operational flexibility (companies can close bank branches, gas stations, hospitals, and grocery stores, but the Postal Service can barely manage to close a post office). The organization needs to collaborate more closely with their industry partners to develop innovative new capabilities. The point is, the Postal Service is still, after all these years of adverse headlines, a viable organization. Let’s start looking forward.

2 Replies

Kent Smith

The “good” news does not mean that the Postal Service is out of the woods yet. The exigent rate case “worked”, if worked meant helping to restore postal finances. Take away the benefits of the extra revenue, and the Postal Service is in worse shape. There are certainly other elements of the current financial situation which are provisional. Like the airlines, the Postal Service is experimenting with fees of various sorts. Not everybody likes additional fees for baggage, or for mail make-up requirements. The unions are likely to be more militant in the next round of negotiations, so management will need to be better prepared. The Postal Service does need to make substantial investments in technology and equipment, but currently lacks the necessary capital. These challenges are all significant, and must be managed. But that does not take away from the current breathing room that has been gained, however temporary that may prove to be.

A lot of this good news is not as good as it appears which is not usual when discussing the USPS’ financial heath.

1. The primary reason the that income is up is due to the exigent rate increase, which at this time is not permanent and in fact the USPS may have to “reduce” the postage charged if the Federal court case is found in favor of the Postal Rate Commission (PRC). This possible reduction and the formula to determine when the “lost” revenue would be recovered is more of the driving force behind the lack of the annual January rate hike than how good the volume increases are.

2. The TOTAL cost of using mailing for advertising continues to rise as the USPS increases the requirements to mailers who attempt take “work share” postage discounts on all rate classes.

In fact the in trial documents the USPS’ legal summary clearly points out that “only” postage rates are capped by Congress, the cost that mailers may have to incur by increasing the investment in equipment, software, finer presorts – increasing the number of trays and pallets the need to be handled and shipped are not capped in any way. Mailers and mail owners will incur these uncapped costs and when combine with the paper industry’s run of price increases will continue trying to work through the the near double digit increase in the total cost of a mailing. Unless the USPS begins to look at the total cost using mail, the temporary bump in revenue due to the exigent rate increase is just that – temporary. Mail volume will continue to decline.

3. Labor unions, the APWU and a few others are now realizing just how much they did give away in wages and in work rules in their last contracts with the USPS. These unions have elected a tougher set of officers who are determined to claw back whatever they can in the next round of contracts. They are not very happy at the continuing but much needed plant and PO closings. As Staples as recent found these union have been very successful is challenging the USPS use of non-postal business and minimum wage worker to replace them.

4. Even with the bump in revenue and mail volumes, the USPS’ need for new vehicles alone out runs any total revenue gains over the next ten years. You can expand package deliveries and even “normal” mail but the total debt and needed investments will require much higher rates and much longer delivery times. Both of which is not good news for business who use mail to drive sale volume.